The case of Sherwood v. Walker was an argument over a cow and set a precedent that has been cited in over fifty cases across the United States. It is a story about a sale gone wrong after a mistaken assumption which led to a lawsuit which went through appeals up to the Supreme Court in Michigan (Gubbins, 2010). A suit for replevin, Sherwood argued that Walker give him his property and complete the sale, but Walker’s argument was that the original sale was void (Ayres, 2017). The case introduced the doctrine of “mutual mistake” as a reason to void a contract, which is still a valid legal concept today, and hammers home the idea of doing due diligence before engaging in a business contract (Nudelman, 2016).
Facts of the Case
Cows are not worth much money unless they are able to breed and give milk (Ayres, 2017). Theodore Sherwood, a banker in Plymouth, shopped for cows at some of the farms belonging to Hiram Walker, an entrepreneur with a distillery business (Gubbins, 2010). Hiram Walker had imported several Black Angus from Scotland and was an importer and breeder as well as a distiller and merchandiser (Gubbins, 2010). Sherwood perused the supposedly barren cows on one of Walker’s farms and chose to purchase a Rose the 2nd of Aberlone, a Black Angus cow, from Walker (Ayres, 2017). Both parties thought that the cow was barren, so its meat value was 5 ½ cents per pound, or around eighty dollars (Gubbins, 2010).
Sherwood went to pay for and take delivery of Rose the 2nd of Aberlone who suddenly turned out to be pregnant (Ayres, 2017). Walker refused to sell Rose the 2nd of Aberlone since she was worth ten times as much as he had previously agreed to sell the cow for (Nudleman, 2016).
Main Legal Issue: Contract enforceability with a mutual mistake
The basic assumption of the contract of the sale is that the cow was barren, meaning that it is not able to breed or give milk as a dairy cow, which would make the price of the cow ten times as much. Both parties in the contract were mistaken about the state of the cow. The core legal question was then: Does the contract need to be honored although the cow is now pregnant and worth a lot more than both parties expected? Does the mutual mistake render the contract unenforceable?
The Court’s Approach: The core material substance of the thing
Sherwood sued Walker and won at the Justice of the Peace. Walker appealed and lost to Sherwood again at the Wayne County Circuit Court. Walker appealed to the Supreme Court of Michigan and finally won (Nudelman, 2016). Supreme Court Justice Allen B. Morse said that “A party who has given apparent consent to a contract…may refuse to execute it…if the assent was founded, or the contract made, upon the mistake of a material fact…and this can be done when the mistake is mutual” (Ayres, 2017). What Justice Morse meant in his decision was that when both parties make a mistake about the core substance of what is being sold, not the quality of it, then either party can refuse to purchase or sell. In the case of Sherwood v. Walker, both parties made a mistake of the core substance of what was being sold: a barren cow.
The fact that Rose the 2nd of Aberlone was able to breed changed her nature as an animal. Justice Morse’s decision was not based around the quality of Rose, whether she was young or old, whether she was fat or skinny. Justice Morse’s decision was based upon the fact that at Rose’s core, she was a productive cow good for milking and breeding rather than a barren cow good for only meat. The going price for a meat animal versus the going rate for a dairy cow illustrates how vastly different these two animals are at their nature. Since both parties had agreed upon the low going price for a meat animal, it indicates that this was a mutual mistake.
Court’s Approach: Summary
This concept is applied when there is a contract for sale between parties and there is a mutual false assumption that affects the core material fact of what is being sold. In such a case, the party that comes off worse in the deal can void the contract (Ayres, 2017).
Applying the Doctrine of “Mutual Mistake” to Business Contracts
In a modern business setting, the concept of mutual mistake can be applied to any contract for a sale when both parties make a false assumption about the core of what is being sold.
Real Estate Mutual Mistake
Two parties are in contract for the sale of an apartment building. The building is inhabited by 200 tenants and is managed by a building superintendent, who is willing to come aboard and work for the new owner to maintain the building and collect rents. Both parties assume that the building is in good shape, as reports from inspectors, the superintendent, and the tenants all appear to be normal.
When the parties arrive at the closing for the real estate transaction, they receive a call that the building had a large fire, is heavily damaged, and will need extensive repairs upon in order to be suitable for tenants to live there again, and the remodel could take months. The core of what the building is just changed: it is no longer a habitable apartment building capable of taking tenants.
Even though the buyer is “under contract” to purchase the apartment building, the contract can be voided by the buyer as both the buyer and the seller were under the mistaken assumption that the real estate being exchanged was a habitable apartment building in working condition, with paying tenants. This is not the fact, and both parties are mistaken, as the nature of the structure is now that it is heavily damaged and requiring extensive repairs and clean up, probably with a hefty insurance claim, to be habitable again. Then, tenants would need to be attracted back to the building, so the building may not have any income at all for a long time.
In this example, the contract can be voided by the buyer before closing because the actual product was not remotely close to what they assumed it was: a functional building.
Art Investment Mutual Mistake
Fictitious Company is a company that builds investments across stock and bonds portfolios, real estate, shipping fleets, and even an extensive art collection. Works of art, like land, tends to appreciate if preserved. Unlike buying land, artwork is portable. Fictitious Company invests in artwork in order to diversify investments without the risk of stock market.
Glamorous Gallery is a company that buys and sells only authentic works of art by famous impressionist painters, such as Monet, Renoir, Degas, and more. Most of these paintings are valued between $150,000 and $100 million. They keep meticulous records and have all their paintings inspected by an internal evaluator, appraised, restored (if needed), and stored properly.
Fictitious Company engaged in a contract for the sale of all of Glamourous Gallery’s inventory of authentic art. The total contract was for $900 million. As the sale date approached, another copy of “Dancer in Repose” by Degas appeared at a Sotheby’s auction along with several other pieces that are supposedly in Glamourous Gallery’s inventory included in the contracted sale. Glamourous Gallery was shocked by this finding, as they believed that all of their inventory was authentic.
Fictitious Company and Glamourous Gallery each hired teams of appraisers and fine art experts qualified in authenticating works of art. Upon examining a sampling of 50% of the paintings at Glamourous Gallery, the experts determined that most of the art at the gallery was of questionable authenticity. Fictitious Company chose not to honor the contract of sale and considered the contract void.
In this case, both Glamourous Gallery and Fictitious Company believed that the artwork at the gallery was authentic. The mutual mistake is that the sale was for authentic artwork. Both companies assumed that the art was genuine, so when the truth revealed itself, the buyer was free to void the contract.
The doctrine of mutual mistake regarding contracts affects businesses still today and is one of the reasons why there is so much due diligence in large sales. Especially with the Internet, there are opportunities for buyer and seller to contract and close a sale without ever physically seeing a vehicle, company, building, plot of land, or other product. Both sides of a sale can make assumptions about something which they are selling and make a mutual mistake. It is important to remember that the doctrine of mutual mistake refers to the essence of a product for sale, not the quality of it. People sell bad products all the time. The concept of mutual mistake means that both parties have to be equally wrong about what they are actually trading is (the core material essence of the thing for sale).
Ayres, Ian. (2017). Contract Law 39 III Sherwood v Walker (pregnant cow). [Video] Youtube. YaleCourses. Retrieved from https://youtu.be/ukfgTUP6YEE
Gubbins, Roberta. (2010). Mutual mistake, the true story of Rose of Aberlone – Otto Stockmeyer reveals the truth of Sherwood v Walker. Retrieved from http://www.legalnews.com/ingham/771228
Nudelman, Steven. (2016). Rose of Aberlone and the Doctrine of Mutual Mistake. Retrieved from https://www.phcppros.com/articles/1059-rose-of-aberlone-and-the-doctrine-of-mutual-mistake